Grasim Industries - Standalone results in-line, UltraTech drives consolidated profits - Centrum

Grasim Industries' Q1FY13 consolidated result was above estimates largely driven by strong performance of UltraTech (60.36% subsidiary), which reported its results earlier. The company reported revenues of Rs67.9bn (vs. est. Rs66.1bn), EBITDA of Rs15.9bn (vs. est. Rs13.7bn) and EBITDA margin of 23.5% (vs. est. 20.8%). Adj. profit at Rs7.2bn was 8.7% above est. Rs6.6bn. On a standalone basis, the results were largely in-line with estimates. Operating margin at 23.8% was in-line with our estimates of 23.6% and profit was at Rs2,729mn (vs. est. Rs2,797mn). We have upgraded our earnings estimate by 22.6%/18.2% for FY13E and FY14E to factor in our recent earning upgrades in UltraTech. With expected drop in Cotton production due to drought like conditions in the US, Europe and India, we believe that VSF prices will sustain at current levels. We upgrade our rating on the stock to Buy (from Neutral earlier) with a price target of Rs3,124, upside of 15.7% from its CMP. Earlier, we had upgraded UltraTech (60.4% subsidiary of Grasim) to Buy from Sell in our report dated July 23, 2012.

- Cement subsidiary's performance helps to beat estimates: Consolidated revenue increased 15.7% YoY to Rs67.9bn (vs. est. Rs66.2bn) led by 16.1% growth in the cement business. EBITDA increased 1.1% YoY to Rs15.9bn (vs. est. Rs13.7bn) led by 8.5% growth in Cement segment's EBIT. EBITDA margin declined 3.3pp YoY to 23.5% (vs. est. 20.8%) primarily due to 12.8pp YoY decline in VSF segment's margins.

- Sequential improvement in performance of the VSF business: Sales volume of VSF increased 40% YoY due to uninterrupted operations at Nagda plant, which was closed for 27days last year due to water shortage. Though, VSF realization declined 15.6% YoY, there was a 6% QoQ increase due to rupee depreciation which resulted in 6.8pp QoQ margin improvement for the segment.

- Conference Call highlights: 1) A new reservoir has been constructed at the Nagda Plant which will overcome water shortage problems at its VSF plants in future 2) ETA Star Cement's operations in the Middle East have improved. Cement realizations was up by US$8/tonne to ~US$67/tonne and EBIDTA stood at Rs170mn compared to a loss of Rs10mn in Q1FY12 3). The company has a planned capex of Rs157bn (already spent Rs42bn till last year). In FY13E, it will spend Rs83bn (Rs15.4bn spent in Q1FY13) 4) With drought like conditions in India, Europe and the US, cotton production could be impacted which may result in stable cotton prices. However, the management was cautious in its outlook due to upcoming capacities in China. 6) The management is focused on achieving operational efficiencies through value chain integration. It recently acquired Terrace Bay, a pulp mill in Ontario, Canada in JV with Thai Rayon. This plant is expected to restart production from Oct '12 and total capex is expected to be ~US$260mn.

- Upgrade to Buy from Neutral: At the CMP, the stock trades at 8.1x FY14E EPS, 4.2x EV/EBITDA and 1.3x P/BV. We upgrade our rating on the stock to Buy (from Neutral earlier) with a price target of Rs3,124, upside of 15.7% from its CMP. Earlier, we had upgraded UltraTech (60.4% subsidiary of Grasim) to Buy from Sell in our report dated July 23, 2012.

Source : Equity Bulls

Keywords